Competition and Manipulation in Derivative Contract Markets

Abstract

This paper develops methods and metrics for quantifying manipulation risk in cash-settled derivative contract markets. I show how to estimate market participants' manipulation incentives, and predict manipulation-induced market distortions, using commonly observed market data. I develop a simple manipulation index, which can be used as a diagnostic metric to detect potentially manipulable contract markets, similar to the Herfindahl-Hirschman index (HHI) in antitrust settings. I apply these methods to estimate manipulation risk in a number of contract markets.

Keywords: derivative contracts, manipulation, regulation

JEL Classification: D43, D44, D47, G18, K22, L40, L50